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Effects of Lybia's return to the oil game

27 Sep

Months of uprising have incurred significant damage to Libya’s 50-year old oil industry. It’s been only weeks since Gadaffi was driven from power, and the National Transitional Council in Libya optimistically believes that the country’s production of oil will return to a pre-civil war level within a year. Many believe it could take longer.

Fields and export terminals along the southern Mediterranean shores show “visible signs of damage,” says the Financial Times. There is no power in the area, workers’ homes are in shambles, and valuables have been stolen. Two of six terminals are badly wrecked, and old oil reservoirs have lost pressure. Tremendous work is needed just to get the country back up and running.

Deutsche Bank and Wood Mackenzie believe there will be a “drawn-out recovery,” one that lasts around 36 months, to return to what the country was producing before the crisis. This is assuming there is “a smooth transition to an interim government, swift removal of international sanctions and the return of International Oil Companies and foreign workers.”

Libya

This speaks to the importance of a new leader implementing the right policies. As FT pointed out, “In 1969, the year Gadaffi gained power, Libya produced nearly as much as Saudi Arabia.” Today, Saudi Arabia is the largest liquids producer in OPEC and has the world’s largest oil reserves with nearly 18 percent of the world total, according to the EIA.

“Libya has for years punched below its potential, hampered by lack of investment as its leader diverted funds for other causes and his personal use; sanctions preventing the return of U.S. companies; and an exodus of engineers to other countries in the region. But executives and officials believe the country, which boasts Africa’s largest reserves, could produce much more oil in the next two decades if the new ruling class pursues the right policies,” says FT.

With Libya’s oil, what matters here is quality, not quantity. Libya has provided the world with only a small percentage of oil, but it is a rare, high-quality crude accounting for 10-15 percent of global output for that caliber of oil, according to FT.

Libya is one example of an inability to quench the world’s thirst for oil. Kazakhstan, Brazil, Iraq and Mexico also have produced less than expected for very different reasons, says Barclays Capital. Mexico’s oil fields have had high decline rates. In Brazil, a new oil law gives a 30 percent stake in all new subsalt projects to state-oil company Petrobras, which could decrease the profitability of other companies. Foreign oil companies and state-run fields in Iraq have had to cut back their production estimates because of an “infrastructure bottleneck.” To fix this issue, the country has planned to build pipelines, tanks and terminals to handle the growth, says Barclays, but the production targets in Iraq have been lowered in the meantime.

Barclays says this “mismatch” between the tremendous demand and a problematic supply side is likely to keep prices high to balance the market, supporting the “long-term fundamentals of the oil market.”

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Posted by on September 27, 2011 in Oil, Policy

 

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